Aventine Hill and Weaver recently hosted the 8th Annual San Antonio CPA Event (see video here). A hot topic continues to be the new ASC 606 Revenue Recognition standard. The guidance has created new challenges for many companies with diversified service offerings.
One of the most significant challenges has been determining how to group promised goods and services into performance obligations. This determination can be highly subjective and complex and the conclusions reached can have a significant impact on how revenue is recognized. Because significant judgment is required, a thorough analysis should be performed and all considerations should be well documented.
Bundle or Un-Bundle
The complexity around how to bundle or un-bundle promises into performance obligations includes determining at what point the customer can benefit from the services provided. For example, certain pre-production services may be performed before goods or services can be transferred to the customer. These pre-production services generally should not be considered a performance obligation as they don’t provide value to the customer on their own.
Additional complexity includes determining if a good or service is separate within the terms of the customer agreement. This assessment can result in seemingly similar transactions being accounted for differently within the same company. For example, product sales and labor services are typically two separate performance obligations; however if the customer agreement is for auto-repairs, the products and labor would likely be combined into a single performance obligation.
It Is Important to Get Right
The identification of performance obligations is critical to properly applying the new revenue recognition guidance. The assessment may be time-consuming and may require significant judgment; however, if the assessment is not done correctly, revenue could be recognized improperly.